HONG KONG HANDARTS CO. PTY. CO. v. MATRIX INDUSTRIES LTD

Acton No. 8147 of 1983

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. The Plaintiff is an Australian limited company which imports toys among other goods. The Defendant is a Hong Kong limited company engaged in the toy business. Under a series of agreements the Defendant agreed to do the following for the Plaintiff, that is to make moulds for certain toys and to execute the art work, photographs and printing for the packaging of certain toys.

2. At the beginning of the trial the Defendant admitted liability for the following claims made by the Plaintiff:-

3. At the beginning of the trial the Defendant also withdrew its counterclaim for the sum of HK$78,000 in respect of Purchase Order No. HKPD/80/M-1 and Purchase Order No. HKPD/81/M-2.

4. That left only two matters outstanding, the Plaintiff's claim for a refund of HK$6,740 it paid for art work, photography and printing ("the art work") under Invoice No. 173/80; and the Defendant's counterclaim for HK$100,800 under Purchase Order No. HKPD/80/C-1 dated 7th July 1980 for 6,000 dozen bendable dolls known as smurfs.

5. Beginning then with the Plaintiff's outstanding claim, it is not disputed that there was an agreement for the art work and that it was carried out; nor is the price disputed. The Plaintiff's contention is that the art work was part of an overall package including the supply of the toys for which the art work was intended, and that since the toys were never supplied the art work was valueless and its cost, which the Plaintiff had paid in advance, should be refunded.

6. It is common ground that the agreement for the art work was evidenced by Invoice No. 173/80, which is simply an invoice for art work, photography and prints development charges. But the Plaintiff claims in its Statement of Claim that "It was mutually agreed that all these designs and finishes for the valueless art work, photography and prints development services therefore were prepared and made for various orders placed by the Plaintiff with the Defendant for the same items specified therein. ".

7. It is also common ground that there was another agreement between the Plaintiff and the Defendant to make various moulds for the toys and that the art work was for the production of the packaging of those toys.

8. In my finding, and the precise extent to which this was disputed did not become clear to me, there was yet another agreement on 15th September 1981 under which the toys to which the art work and moulds related were to be shipped to the Plaintiff by the 10th October, or HK$17,200 refunded. As I have already recorded the Defendant admits liability for the HK$17,200. Now in the ordinary way, where finished goods are not delivered, the purchaser would be able to recover advance payments in respect of those goods whether they were made for design work or whatever phase of manufacture. But here we have separate agreements for first, the art work, then the moulds, and finally the manufacture and shipping. The Managing Director of the Plaintiff Company, Mr Michael Ng, testified that the art work was valueless unless the goods were manufactured and shipped. But there is a world of difference between that and an agreement for the purchase of goods in respect of which an advance payment was made for art work. The Plaintiff has not produced evidence of that. On the contrary at a meeting on the 15th of September 1981 when the consequences of non-shipment by the lst October was discussed, only the refund of HK$17,200 was agreed. That is clearly inconsistent with a composite agreement or even an agreement to refund the advance art work payment made; in addition it is also inconsistent with any implied term to the latter effect. In my finding therefore the Plaintiff has clearly failed to establish that the HK$6,740 should be refunded. In addition, in my view the claim has not been adequately pleaded in the Statement of Claim. That the art work was "prepared and made for" orders subsequently placed, does not necessarily mean that it was not to be paid for any way. For the foregoing reasons the Plaintiff's claim for HK$6,740 fails.

9. I proceed then to the Defendant's counterclaim for HK$100,800. It is not disputed that there was an agreement for the supply of 6,000 dozen bendable smurfs and that the Plaintiff cancelled the order as it was not able to obtain a licence to sell the goods in Australia from owners of the copyright. That was a repudiatory breach of the agreement, which however was not immediately accepted by the Defendant. Whichever way the matter is viewed the Plaintiff was in breach and is liable in damages. At the trial Mr Ng did not seek to deny that, but asked that the Defendant prove its loss as he did not believe it had manufactured the smurfs. The Defendant claims $100,800 in damages which is the contract price i.e. 6,000 dozen at $16.80Ø per dozen. Put in another way, it is said on the Defendant's behalf, to comprise the cost of manufacturing the smurfs i.e. $84,600 and an element of profit consisting of the remainder i.e. $16,400.

10. To prove that it did manufacture the bendable smurfs, the Defendant relies essentially upon the evidence of Mr Wong, its Managing Director. Mr Wong testified how he had moulds manufactured by a mould maker, Chiu Tat, after Mr Ng showed him samples in March 1980. He added that he got the Chun Tat Plastic Manufactory thereafter to manufacture 6,000 dozen bendable smurfs between June and October 1980. He was not able to produce any documentary or other circumstantial evidence in support, other than an invoice and receipt purporting to have been issued by the Chun Tat Plastic Manufactory. Mr Wong was so unsatisfactory a witness that even Miss Susan Kwan, the Defendant's Counsel, was constrained to submit that not all his evidence should be rejected. However not only his demeanour but also the content of his testimony were such that in my view no reliance at all can be placed upon it. On the contrary his evidence has cast a pall of doubt and suspicion over the entire counterclaim. Moreover he failed to make any specific demand or claim in respect of his alleged loss until the Plaintiff took legal proceedings against him, although he had ample opportunity to do so and indeed ought to have done so when the Plaintiff was pressing him for refunds, and when his solicitor was responding to the Plaintiff's claims and demands. I find the explanation that he did not want to prejudice his business relations with the Plaintiff totally unconvincing. I also find incredible the alleged destruction of the 6,000 dozen bendable smurfs without consultation with his co-director and more particularly the Defendant's solicitor who had not long before written to the Plaintiff incidentally claiming expenses of manufacture. Evidence, particularly documentary evidence of cancellation of the order before 27th November, 1981, in my view, also casts some doubt on whether the smurfs were manufactured. And as to the suggestion, that the Defendant's agreement in September 1981 to ship the smurfs by October 1981 indicates that they were manufactured, I think it is countered by similar arrangements also cheerfully made by the Defendant for other toys which in the event were neither shipped nor ever delivered.

11. LAW Yui-kui testified that he was the sole proprietor of Chiu Tat and that he manufactured 4 sets of moulds for the bendable smurfs, only one set of which was for the head (as opposed to the body and accessories). The mould for the head was an injection type. Mr Law said that the price of the 4 sets was HK$38,000 but he was confused as to what the individual sets cost. When completed, he said he delivered the moulds to the Chun Tat Plastic Manufactory, but did not consider a delivery note or receipt necessary. No documentary evidence at all relating to the Chiu Tat part of the transaction was produced.

12. CHAN Chi-kwan, a partner of the Chun Tat Plastic Manufactory gave evidence that he manufactured 6,000 dozen bendable smurfs for the Defendant, then shipped them to China for painting, assembling and packing before getting them back. I was not impressed by his testimony that he stored the packages, which he said occupied no less than 2,000 cubic feet, in his factory from about September 1980 till some time in 1984 when he had to move his factory; that he accepted piecemeal payment of $84,600 as the Defendant was short of funds; that he did not keep records of such payments but only issued an invoice and receipt when payment was completed in October 1981; and that when he had to move his factory in 1984 he destroyed the bendable smurfs with the Defendant's approval, recovering material from the heads worth a few thousand dollars which he simply let his workers - all 4 of them - have. Aspects of his evidence strain credibility.

13. Mr Ng of course was not in a position to contradict Mr Wong or Mr Chan in regard to the actual manufacture of the bendable smurfs except in one respect. This was that the samples by reference to which the 6,000 dozen bendable smurfs were ordered, required the heads to be hollow or the smurfs would topple over. It is not disputed that the Defendant's mould would produce solid heads. Notwithstanding a couple of lapses in accuracy or recollection, and one non-crucial respect in which I do not accept his evidence, I consider Mr Ng a truthful witness. I accept his evidence in general, and in particular his claim that the smurfs he ordered had to have hollow heads. That also militates against the 6,000 dozen smurfs having actually been manufactured.

14. Having regard to all the evidence, I am far from satisfied that the Defendant did have the 6,000 dozen bendable smurfs manufactured. I rather think that they were probably not manufactured at all. But I need not go so far as that, for the onus is upon the Defendant to prove on the balance of probabilities that it sustained the damage claimed, and in my finding it has failed to do so.

15. Proceeding to the loss of profit, this it might be though ought to be offset by the $38,000 received by the Defendant for the moulds concerned. But that was not suggested by either party and there is more than a suggestion in the evidence that the moulds were dealt with as a separate agreement. In consequence the Defendant is in my view entitled to loss of profit. However no evidence nor indeed attention was directed to its quantum, and I do not consider a passing referee from the bar to profits comprising the balance of the $100,800 claimed, as sufficient to warrant an award of $16,400. I propose therefore to order an enquiry into that amount if the parties cannot agree to it. The counterclaim accordingly succeeds only to that extent.

16. There will accordingly be judgment for the Plaintiff on the individual claims accepted by the Defendant. But for the reasons mentioned the Plaintiff's claim for HK$6,740 paid for art work is dismissed. There will also be judgment for the Defendant on its counterclaim in respect of loss of profits. For the ascertainment of the amount of that, I shall order an enquiry if the parties cannot agree.

17. I will now hear Counsel on interest and costs.